The Breakdown | Explaining Southern California's economy

Solyndra-gate and the reality of Green investment

I went on KPCC's AirTalk with Larry Mantle this morning to talk about the Solyndra bankruptcy and what's turning into something of a scandal. This was hot on the heels of the Atlantic's Megan McArdle and Reason's Tim Cavanaugh going after not just the politics of this sucker, but also the very notion that the Federal government should be investing in renewable energy in the first place. 

Just for background, Solyndra got a $535 million loan guarantee from the Department of Energy in 2009, four years after it was founded and well into an application process that was initiated under the Bush administration (Grist has the blow-by-blow on all this). Prior the the DOE loan, Solyndra had raised venture funding; after the DOE loan, it raised even more, eventually amounting to $1 billion. Post-bankruptcy, the Washington Post reported that the White House had been edging the DOE toward an approval, so that Joe Biden and DOE head Stephen Chu could schedule appearances. And just to make things extra juicy, a big Obama supporter and "bundler" of campaign donations, George Kaiser, has a venture fund that was heavy into Solyndra.

There have been FBI and DOE Inspector General raids of Solyndra's Fremont HQ, and yesterday, Congressional hearings on the matter. There are basically two things going on. First, there's the whiff of wrongdoing about how Solyndra's DOE loan approval was possibly accelerated. Then there's the whole question of whether the DOE showed some kind of favoritism to Solyndra because of Kaiser's involvement — after all, the $500-million-plus guarantee certainly provided the leverage incentive that Solyndra needed. Additionally, there's a question about whether it was clear that the solar market was going to turn against Solyndra and its technology before the company ran out of money and could either launch an IPO, secure additional private investment, or make a case to the DOE that it needed more funds.

Here's McArdle's analysis, which she prefaces by characterizing Solyndra'a business model as a bet on the high cost of polysilicon (conventional flat panels use polysilicon, which was very expensive in 2008, but much cheaper in 2009; Solyndra's tech used no polysilicon and offered several other innovations related to installation and sunlight-gathering):

[T]he reason that it doesn't look good is not, as some conservatives seem to be dreaming, because it exposes some deep corruption at the heart of the Obama administration. Rather, it exposes how badly these things can go wrong when government bureaucrats are assigned to make political dreams come true with Other Peoples' Money….The problem with Solyndra is not George Kaiser. It's the whole concept behind a program that is supposed to enable politically favored technologies, using loan guarantees that look cheap when they're issued, and end up costing us half a billion dollars because we rushed the due diligence to make sure top officials got a good photo op.

I think this is completely wrong — in fact, I think the government might have spent too little on Solyndra — but let's also consider Cavanaugh's take:

While Solyndra will be useful as a campaign issue, the real outrage is that the government is proudly putting your money into companies that private investors are unwilling to put their own money into. Once this violation of common sense has taken place, the story can only end, as it appears to have ended here, in suffering and crime. That’s not a corruption of the system. It’s the natural way the system works.

Obviously, there was investor interest in Solyndra before the DOE moved in. You could say that it was building the Betamax of the solar-energy sector, to conventional flat-solar's VHS (pricier, higher-quality, more flexible v. a cheaper known quantity that could be commodified). But what it was really doing was marketing solar innovation, the kind of thing that presents a competitive advantage in he face of the massive investment — $30 billion — made by China in conventional solar. 

As I've written, the main problem with Green energy isn't that it lacks growth. What it lacks is scale — the scale that's needed to compete with coal, which is the cheapest fuel available to generate electricity on Planet Earth (regrettably, it's also the dirtiest). Scale comes from serious investment, and the only way to ramp up that investment is for the government to subsidize some of the risk. "Government bureaucrats" didn't identify Solyndra as investment-worthy — the private sector did. Additionally, all the money that Solyndra burned…had to be burned! The whole point of a startup is to spend all the money in order to establish market value that can then be tapped in an IPO, or be used to attract additional investment rounds. Much of the time, it doesn't work out. But if China thinks the Green market is worth $35 billion in yearly startup funding, that might be an indication that tens of millions of first-round VC here and there isn't going to cut it.

On AirTalk, Myron Ebell, Director of the Center on Energy and Environment, insisted that a broke USA needs to invest in cheap domestic energy rather than expensive alternative energy. I'm not sure why we can't do both, given that investing in Drill Baby, Drill! would make cheap energy even cheaper (although not necessarily cleaner) and investing in expensive alternative energy will enable it to become cheaper over time.

Other other side, Dan Weiss of the Center for American Progress maintained that other countries are investing aggressively in what could be a "$2 trillion" Green economy and that the U.S. needs to keep pace.

Honestly, I don't like the idea that the specifics of Solyndra case — the allegations of political brokering, the advanced nature of the technology — are distorting the way we discuss Green investment. You can't say the problem isn't George Kaiser because there would literally be no problem if investors weren't willing to dive in, take on the early risk, and identify companies that might merit the DOE's attention. There will be winners and losers no matter what. But the government isn't picking them. And if it doesn't continue to bring money to the table and take risk off, the winners will never win as big as they could.

Photo: Solyndra